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Alex: Now it’s really easy for an investor to say, look how green our portfolio is, we don’t hold any problematic companies like fossil fuels or alcohol and so on. But that would be similar to if a doctor was to say, look how great a doctor I am, none of my patients are sick. Well, it’s your responsibility as a doctor to go to the sick patients and to treat them and to make them better, not just to turn them away and say, I’m only going to be working with the healthy. So similarly, as investors, I do think there’s a lot to be said out of going with problematic companies and engaging.
Aoifinn Devitt: I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Alex Edmonds, who is a professor of finance at the London Business School. Alex has a PhD from MIT as a Fulbright scholar and was previously a tenured professor at Wharton and an investment banker at Morgan Stanley. Alex has spoken at the World Economic Forum in Davos. Testified to the UK Parliament and given the TED Talk, What to Trust in a Post-Truth World, as well as the TEDx Talk, The Social Responsibility of Business, with a combined 2.4 million views. Alex’s book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, was featured in the Financial Times list of business books of the year for 2020. And he’s a co-author of Principles of Corporate Finance with Brealey, Myers, and Allen for the 14th edition to be published in April 2022. Poets and Quants named him Professor of the Year for 2021. Welcome, Alex. Thanks for joining me today.
Alex: Thank you, Aoifinn, and it’s great to be here.
Aoifinn Devitt: Well, let’s start with your background. Alex, where did you grow up? What did you study? And did you always intend to enter the world of finance?
Alex: I grew up in Reading, which is in the south of England. And at secondary school, I studied a strange mix of subjects. So in England, you do A-levels, and you typically do only 3 or 4 subjects. So most of my friends did either pure sciences, which is like maths, physics, chemistry, or pure arts and humanities like English, history, and French. I did an unusual combination. I did both arts and sciences. So I did English, economics, German, and also maths. And that’s what made finance interesting to me, because it’s a social science. So you do have some theories. So it’s not completely subjective. But those theories aren’t set in stone like they are in physics. So reasonable people can have different views. Some people might think taxes should be higher, others might think taxes should be lower. They can make their arguments and they can learn from each other’s viewpoints. And that to me was what was really interesting about finance and economics. And so when I went to university, I studied economics and management at Oxford as an undergrad.
Aoifinn Devitt: It certainly is an emerging area, the human side of economics, and we’re looking a lot at behavioral areas, so we can certainly get back to that. And in terms of pursuing an academic path, can you talk us through your first year time in finance as a practitioner? And then how you moved towards an academic path.
Alex: Absolutely. So I never wanted to be an academic when I was growing up. So after economics and management, I, I went to Morgan Stanley to work in mergers and acquisitions, and I actually really enjoyed the job. So you’ll get a lot of ex-bankers who were mistreated and worked really long hours, but I was really lucky to have worked with some fantastic people and think I learned a lot. But why did I choose to leave? I remember the first time I did a deal, It was a great feeling. The next day, the Financial Times front page was describing that deal. And then the day afterwards, the headlines were something different. And I thought, well, I’ve spent 7 months of my life solving one company’s problems at one point in time. Whereas in academia, if you write a paper, that could be timeless, that could apply to different companies in different industries in different countries, over different time periods. So I thought that the bandwidth of your potential impact would be higher in academia than in industry.
Aoifinn Devitt: That’s interesting that, because I suppose that depends on there being a good nexus between academia and practitioners, so that some of the research that you’re doing gets put into practice. Do you think that the dialogue we have currently between academics and industry practitioners is at a level that we need it to be? Or do you think it could be improved?
Alex: I do think there’s a lot of room for improvement. So at the moment, some, although certainly not all practitioners, look at academic research somewhat opportunistically. So they might have an idea of what they would like to be true. And they will fish for whatever academic study supports their viewpoint. So in ESG, for example, there’s a lot of supporters of ESG, you can always find a study that shows that ESG pays off. And if you’re a skeptic, then you can similarly find a study which supports your point of view. And that is without looking at the quality of the study or the rigor of the study. Often you’ll use academic research a bit like a pick and mix, you just choose what you want. And I certainly don’t want to just blame the practitioners. Similarly, for academics, sometimes there’s a huge incentive to give these simple soundbites so that you’ll be handpicked by practitioners. So if you give— write a paper which finds something appealing, claiming ESG always pays off, or CEOs are always overpaid, or share buybacks are always a bad thing, that’s something where you will have a captive audience. Why I fear that academics are sometimes skewing the results of their research to be something that will be picked up by practitioners and into 280 characters.
Aoifinn Devitt: That’s interesting. Also, we talked earlier about your TED Talks in the introduction. I do think that having different ways of framing your research and perhaps communicating it certainly helps, as opposed to, say, longer journal papers that may not be always absorbed.
Alex: That is true, because like, as an academic, how you get tenure and promotion is for academic articles published in academic journals, but those articles are often really complex and obscure, and they’re not impactful for a general audience. So it means, yeah, your research research gets published, but does it have impact on the wider world? Probably not. So I do think it’s incumbent upon academics to make their research more accessible. That could be through writing articles in, say, the Financial Times or the Wall Street Journal, doing podcasts like this. And I do think it’s a huge pleasure, not a burden, to be able to speak to practitioners. However, how the academic sort of hierarchies work is you are not really evaluated according to your wider impact. And there are indeed some academics who think, well, if you are explaining it to industry practitioners, you’re dumbing the research down, a bit like some people might look down at indie musicians who go mainstream for selling out and not being pure. But I think that’s a really snobbish way of looking at things, right? We do research in order to have impact. We are funded by alumni and by corporate donors and so on, and they want us to do research because it affects the wider world, not just because it’s something that other academics can see as intellectually interesting. So I do think it’s incumbent upon us as a profession to make our research more relevant. Really appreciate invitations like this podcast to be able to do that.
Aoifinn Devitt: Well, let’s dive straight in then to your current areas of research. And what are your main focuses today?
Alex: The main thing that I’m focused on right now is responsible business, the idea that business should serve wider society, not just short-term shareholder interests. And this is a topic where I’m certainly not the only person working on this topic right now. But many people, they focus on the moral and ethical case. For responsible business, and some seem to like guilt-trip companies and say, well, it is your moral responsibility to serve wider society. But why I think that’s problematic is for two reasons. First, I’m not sure whether this guilt-tripping approach works because different people will have different preferences as to what is important. Some people might say, you as a company, it’s your responsibility to shut down all your coal-fired power stations because climate change is a huge threat. Whereas others might say, no, if you do that, you’re going to make a lot of people redundant who are working in power stations and so on. We do care about employment, particularly among those who might not be as affluent as often the people reflected by investors and so on will be able to think about. So I think one issue is that there are some things which are subjective and different people have different values. And then number two is that if it’s purely a moral and ethical case, then it will always be secondary to the minds of any CEO or CIO. So what I try to focus on is the business and financial case. So why should a company be responsible? Yes, it’s good for wider society, but also it’s good business. And so what I try to do is to merge and the objectives of profit and purpose and show that in some occasions, it is possible to achieve both. And that’s in contrast to the polarization you often see. Some people think businesses should always be about just serving wider society. Others will argue, no, the goal is only profit, and ESG is a distraction. I want to try to have some middle ground and say it is possible to create shared value for both shareholders and wider society.
Aoifinn Devitt: That’s very interesting. You mentioned on some occasions, it makes good business sense. Do you think that as the case for responsible investing and responsible conduct becomes more and more integrated into typical business plans, that those incidents where there is that impact on the double bottom line, as positive impact, are growing, that it’s increasingly easy to make the business case for responsible behavior?
Alex: I’m actually not sure. I think there’s arguments for both ways. So on the one hand, yes, there is indeed evidence that many things do indeed pay off for both social and shareholder value. So why my book, which you referenced, is called Grow the Pie. The idea is that the pie is not fixed. It’s not shareholders who are fighting with stakeholders. There are certain things that you can do which can benefit both. So as an example, if you treat your workers well, That’s not just being humane, it’s also making the employees more motivated and more productive, more likely to stay, boost your long-term performance. But I think there will always be some inherent trade-offs. For example, if a company donates to charity, that automatically reduces profits. It reduces the dividends that a company can pay to its shareholders. And it means that the shareholders themselves, let’s say they often might want to give part of their dividends to charities., but they’re not able to do that if the dividends have fallen because the company has made that charitable donation division. So I think regardless of how much attention gets paid to responsibility, the fact that it is becoming more embedded, as you say, even, there will always be some inherent trade-offs. I think one of the problems with the responsible business movement and why ESG has got a backlash in recent years is that there are some advocates who deny any instance of a trade-off, and it seems then a bit like wishful thinking, and it’s not something which is convincing many business people.
Aoifinn Devitt: I think that just getting back to, I know in your book, you mentioned that some of the calls for reform are too unrealistic and unbalanced. And that’s, I presume, what you’re referring to there. Are there any other examples of where some of the requests just aren’t practical in terms of requests for reform?
Alex: Yeah, so I think one of the concerns is that people think that it’s a company’s responsibility to solve all of the problems in the world. So we often think a purposeful business should serve customers and workers and the environment and suppliers and so forth. We have the 17 Sustainable Development Goals, and often investors and workers and customers will have a box-ticking approach and say, well, how many of these SDGs do you tick? But why is that problematic? Two reasons. First, there’s trade-offs between different stakeholders. So going back to my early example, if you are shutting down a polluting plant, that’s great for the environment, but it’s bad for workers. And so you can’t serve everybody. That is a decision in which you’re going to benefit some and hurt others. And then number 2 is that there’s also trade-offs between shareholders and stakeholders. So we often hear this message that everything that we do to benefit wider society will always show up in long-term profits. But the evidence doesn’t support that. What it supports is the idea that if you invest in material stakeholder issues, that does pay off. So what do I mean by material stakeholder issues? Those are the ones that are most relevant for your industry or your business model. Again, let me give an example. Let’s take the tech sector. What is a material stakeholder issue? Those could be things like cyber addiction, cyberbullying, misinformation, customer privacy. And if you are top of your game on those issues, that’s really important for your business. However, climate change, yes, that is the world’s greatest threat right now. However, that is not that material an issue for a tech company, because you do your business in the cloud, you don’t have so much of a footprint. So even if you are top of your game and the first among equals in your industry, that’s not going to be so critical to you. So what’s important is for a company to recognize what are the key material stakeholder issues in your industry, and focus on those and not try to be all things to all people.
Aoifinn Devitt: And obviously, one of the key objectives here is balance. In the approach. If you were to look at, say, where the pendulum is swinging today, and you think of some of the expectations in the aftermath of COP26, and what we saw some very high-profile private sector asset managers proclaim, where do you think the pendulum is in terms of around that balance? Has it swung too far, perhaps, in favor of gestures towards responsible investing, which maybe leads to greenwashing down the line?
Alex: Yes, I don’t think that we are close to where the optimal balance is. So If we go back 15 years ago, so when I first started working on this topic, nearly everybody was very skeptical about ESG. And now what’s great is that people do recognize it’s really important. But I do think the pendulum has swung too far the other way, is that people think, well, ESG is the only important thing, let’s forget about profits and long-term commercial success. And so how does that manifest? Well, when an issue comes in the news, Everybody is calling for companies to react to that issue immediately. So let’s say Mr. Floyd is killed, then every company is expected to speak out immediately or donate money to Black Lives Matter. And certainly, as an ethnic minority myself, I am very sensitive to the importance of racial diversity and inclusion. However, what is the best way for a company to address that? It might be not to immediately donate money to charity, but to look internally about discrimination in its hiring and promotion processes. Not just on ethnicity, but gender and many other dimensions. It might not only look at diversity in terms of the number of people it’s hiring, but inclusion, what are the ways that they’re incorporating psychological safety, encouraging dissent, and so forth. It’s really easy for a company to react by just posting a black square on Instagram, or donating money. And I feel that in a world in which investors are calling for quick sort of visible signs of doing something, then what companies will focus on is what’s externally visible, rather than what actually makes a lot of difference. A second issue, as I alluded to earlier, is climate. And absolutely, don’t get me wrong, I believe climate to be a really, really important issue. However, there are important trade-offs, and if you are too quick on decarbonization, you will make a lot of people redundant. And those people, to be fair, many of them are working-class people who, if they were to be made redundant, it’s not clear how quickly they might get another job. And that’s something which will really jeopardize not only their future but their families’ financial future as well. And also even with climate, it’s really nuanced. So one of my other hats is as a practitioner, I’ve served on the Responsible Investment Committee for Royal London Asset Management for 6 years. And we run 6 sustainable funds. And as some of you will know, MSCI has this warming tool, which calculates the contribution of your portfolio towards global warming. And when we ran this on our portfolio, we found that the worst offenders were semiconductor companies. Why? When you manufacture semiconductors, you release perfluorocarbons to the atmosphere, and perfluorocarbons are even worse than carbon dioxide for leading to climate change. Yet semiconductors can be used in solar panels. They could well be the solution to climate change. So this demand for companies to decarbonize and not do any activity which contributes to carbon footprint that might ironically stifle some of the best solutions to climate change, such as building semiconductors.
Aoifinn Devitt: It certainly would be a case for the long-term versus maybe the short-term, a short-term fix versus the long-term commitment and long-term thinking. Another area of grandstanding, or at least of gestures, seems to be in the area of divestment versus engagement. What are some of your thoughts on where we are in terms of having a sensible conversation on that?
Alex: Thanks, Aoifinn. I’m really glad you asked that because I think this is something which is quite greatly misunderstood. So often people think, well, the best way to change companies is to divest from, say, fossil fuels, from tobacco, from alcohol, because when you sell, you’re depriving a company of capital. But that’s not the case, right? Because you can only sell when somebody else buys. So if I’m selling my stock, another investor might buy, and that other investor could well be less concerned about climate change and social issues than me. So it might be in many cases The best way that I can actually ensure that a company is going to reform itself is by holding those assets and engaging with the company. For example, Engine Number One, the activist hedge fund, the only way it was able to get some climate-friendly directors on the board of Exxon is by having skin in the game, by having a seat at the table and being able to push those directors’ nominations through. Now it’s really easy for an investor to say, look how green our portfolio is. We don’t hold any problematic companies like fossil fuels or alcohol and so on. But that would be similar to if a doctor was to say, look how great a doctor I am. None of my patients are sick. Well, it’s your responsibility as a doctor to go to the sick patients and to treat them and to make them better, not just to turn them away and say, I’m only going to be working with the healthy. So similarly as investors, I do think there’s a lot to be said out of going with problematic companies and engaging. Now, certainly there is a limit. If after engagement, a company is still really unresponsive, then I do think you should divest. But I do think we want to look at both tools together. Whereas, as I alluded to earlier, sometimes we look at this as an extreme. We want a company to always divest as the first port of call, just to show that you’re not holding any airports or energy companies when I think actually actually, it might be quite legitimate for you to hold these problematic companies if you’re engaged with them, and there is evidence that the engagement is indeed making a difference.
Aoifinn Devitt: Do you think there’s a precedent set in the case of Engine No. 1 now that engagement has teeth? And do you find companies getting more responsive?
Alex: Yes, and actually, it’s interesting, it’s not just Engine No. 1, because I need to make sure that I’m not subject to my own criticism, which was that you can always handpick one example to support your viewpoint. Instead, way before Engine Number One, there were some really nice academic papers which looked at large-scale shareholder engagement across a multitude of dimensions. And often people think, oh, we don’t like shareholder engagement because shareholders are always going to just be about short-term profit. When they engage, aren’t they forcing companies to pay out more dividends and to cut wages and so on? But that’s not the case. So there’s some really great academic studies published in the most stringent journals showing that when engagement takes place, this will typically increase not only shareholder value, but also increase productivity. And it will do so without lowering wages. It also improves dimensions such as innovation. And this makes a lot of sense, right? Because if you’re a shareholder, what you want to do is to improve the company for the long term. And the way that you do that is to encourage companies to take these ESG issues more seriously, encourage companies to be more innovative, and so forth. So I do think engagement engagement typically is a useful tool. Now, clearly, it shouldn’t be just engagement and not divestment. Often, the reason why managers might be responsive to engagement is they know that if they’re not responsive, the investor will dump the stock and that will drive down the stock price. So I do think we want to have a combination of the two rather than just one or the other.
Aoifinn Devitt: And speaking of innovation, could you talk a little bit about innovation in your space? What are the areas of research currently that most excite you and maybe what you think will be occupying your mind and maybe you’ll be sharing with us over the next 5 years?
Alex: So I think within ESG, I think this has become a really major issue that many academics are trying to research. So 15 years ago, when I was writing my first paper on this topic, it was so hard to publish because this was not seen to be an interesting field. But now people have finally realized that this is something where there’s a lot of interesting questions. That practitioners want answered. And we as academics, we have the luxury of time and space, and methodologies in order to do that. So I also serve as the managing editor for the Review of Finance, that’s the top finance journal in Europe for academics. And we have just launched a special issue on sustainable finance, because we think it’s an area where there’s a lot of potential interest and a lot of great datasets. One other big issue within finance, what a lot of academics are looking at is fintech. So what is the potential impact of, say, blockchains and smart contracts and so forth? Is this something that could create value for society? Is this something which could be destructive? And so on. So I think those two areas are really interesting and where you’re seeing a lot of really exciting research.
Aoifinn Devitt: And let’s just take a few minutes to go back to some of your personal story, maybe, and reflections. If you have any creed or motto that you live by, whether in your academic work or as you bridge the practitioner and academic side, is there anything you can share there?
Alex: Certainly, it’s not so much a creed or motto as much of a purpose statement. So just like companies have purpose and mission statements, I’ve tried to do that for myself, which is to use rigorous research to influence the practice of business and to inspire other people to fulfill their potential. So let me briefly break that up. Let’s take the first part, to use rigorous research to influence the practice of business. So as an academic, my heart is research. However, I want to ensure that my research is not just read by other academics to look at something which is intellectually interesting, but instead to look at questions which are practical, such as, does purpose pay off? What’s the best way to pay CEOs to ensure they run their companies for the long term? So I love working on these relevant questions. And then also the opportunity to disseminate them to practitioners, such as through this podcast. Also the opportunity to be challenged by practitioners. So I will often present my research to companies. Actually, when we finish this podcast, I’m going to be joining a large asset management firm who have a book club. They’ve kindly selected my book Grow the Pie as, as the reading for the book club, and they will challenge me for things that they might not agree with. And through that process, I will be learning. And then the second part I mentioned is to inspire others to fulfill their potential. And this affects what I try to do in my life outside of work. For example, when I was a professor at Wharton, there were various charities which would come to me and say, Alex, could you serve on the charity board for this homeless charity or the hunger charity? They will always ask me to serve as treasurer, obviously, as being the finance person. But I said no to those. Why? Certainly homelessness and hunger are really important causes, but that wasn’t really linked to my purpose of inspiring others. So instead, the position that I took was to be the head coach for the American Cancer Society. So if somebody was to run a marathon for American Cancer Research, I would coach them, and I’d love that interpersonal inspiring aspect of coaching, just like I really really I love the teaching aspect of my profession. You could take somebody who comes to London Business School to do the MBA. Their goal is to do marketing. They’re only taking finance because they have to, because it’s part of the core. They dread it, but I’m trying to make it interesting and accessible and ignite in them a passion for finance that they might not have otherwise known. And that’s similar to what I wanted to do with the American Cancer Society. Somebody might see a marathon as something really daunting. To make that fun and to get them to believe in themselves and to achieve something that they previously thought was really difficult.
Aoifinn Devitt: Well, it’s a nice analogy actually, as a marathon runner myself, and marathons are the ultimate long game. And I suppose if you can break up any long game, whether that be marathon running or solving the problem of climate change into chunks, it certainly seems less daunting. And I may have to draw upon your coaching skills. I’ll file that one away for future reference.
Alex: Thank you. Yeah, I think it is like anything which has a big long-term outcome, it’s sometimes you might get demotivated because it’s really difficult to see progress, or you think the goal is so far off that if I was slack on one particular day, is it going to really make a difference? So yeah, if your goal is to run a marathon, you might think, well, I’m going to get to 5 miles by week X, maybe I’ll enter a 10K race by week Y, then a half marathon, and just to break something really long-term into small chunks is something that can be really motivating.
Aoifinn Devitt: And my last question is around any advice you might have for your younger self. And I think it’s particularly interesting given the dynamic field in which you work. You may not have perhaps anticipated the speed with which some of your ideas would gain currency, but equally, you may have experienced frustration around others not getting the same traction. Is there anything that you know now that perhaps you wish you had known as you embarked upon all of this?
Alex: Yes, I think it would be that if you live your life or your career trying to get external approval, that’s going to be something which is really random, right? If you write an academic paper, how do you know whether the journal will like it, right? The journal will send it to a peer reviewer, and that peer reviewer, their taste just might not be for fintech or for ESG. So even if they are important topics, somebody might just not like it. And similarly, you could do a great job in a pitch for a deal if you’re a banker, and you might just not get that pitch if, for example, the client just happened to jive on a personal level more with another type of banker. So I think it’s just to try to do what you yourself are passionate about. I know a lot of people say, ‘I’ll pursue your passion.’ It’s almost a cliché. But I do think it really has a lot of truth behind it. So when I worked on ESG back in 2006, I didn’t do it to get external approval. I didn’t do it because the journals were publishing papers in it. Nobody cared about it in academia, and few people cared about it in the real world. But because perhaps I have the long-term mindset, which was instilled in me through marathon running, I wanted to look at our companies that take a long-term approach. Or take an ethical approach for their employees, will they do better? I was just passionate about that question. And so when I submitted my paper to the first journal and it got rejected, I still was excited about the question. I kept persevering, and in the end it ended up being published in a top journal. But it did take a lot of work because the first couple of journals rejected it just because it was something new. So I think the whole idea is that yes, people know about the importance of perseverance, but you’re much more likely to persevere if you are doing what you’re passionate about and if you really realize that your external success will be partly due to randomness, so that when you do get rejected or when you do not win a particular mandate, you know that it is not purely down to you. It might be partly a taste issue, so this gives you the courage to keep going even if success is not immediately forthcoming. Now, that does not mean being blinkered. Certainly, if there is some feedback as to why your paper got rejected or why you did not win the mandate, try to take that on. But does that mean I should have completely changed my research field to work on efficient markets or something traditional. No, I still kept with ESG, but just to make sure that I would address the concerns of the editors and reviewers.
Aoifinn Devitt: Well, thank you so much, Alex. What I think of when I look at your research and after this conversation is really how, just how relevant and how integrated the work you do is into the real-time practice. And real-time is important because you’re getting your ideas out real-time, and you’re allowing them to be debated and really road-tested. So I really appreciate you coming here and sharing those insights with us.
Alex: You’re very welcome, Aoifinn. It’s great to be here. Thank you so much for the invitation to be on your podcast.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views Opinions are personal and should not be attributed to the organizations and affiliations of the host or any guest.
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Alex: Now it’s really easy for an investor to say, look how green our portfolio is, we don’t hold any problematic companies like fossil fuels or alcohol and so on. But that would be similar to if a doctor was to say, look how great a doctor I am, none of my patients are sick. Well, it’s your responsibility as a doctor to go to the sick patients and to treat them and to make them better, not just to turn them away and say, I’m only going to be working with the healthy. So similarly, as investors, I do think there’s a lot to be said out of going with problematic companies and engaging.
Aoifinn Devitt: I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Alex Edmonds, who is a professor of finance at the London Business School. Alex has a PhD from MIT as a Fulbright scholar and was previously a tenured professor at Wharton and an investment banker at Morgan Stanley. Alex has spoken at the World Economic Forum in Davos. Testified to the UK Parliament and given the TED Talk, What to Trust in a Post-Truth World, as well as the TEDx Talk, The Social Responsibility of Business, with a combined 2.4 million views. Alex’s book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, was featured in the Financial Times list of business books of the year for 2020. And he’s a co-author of Principles of Corporate Finance with Brealey, Myers, and Allen for the 14th edition to be published in April 2022. Poets and Quants named him Professor of the Year for 2021. Welcome, Alex. Thanks for joining me today.
Alex: Thank you, Aoifinn, and it’s great to be here.
Aoifinn Devitt: Well, let’s start with your background. Alex, where did you grow up? What did you study? And did you always intend to enter the world of finance?
Alex: I grew up in Reading, which is in the south of England. And at secondary school, I studied a strange mix of subjects. So in England, you do A-levels, and you typically do only 3 or 4 subjects. So most of my friends did either pure sciences, which is like maths, physics, chemistry, or pure arts and humanities like English, history, and French. I did an unusual combination. I did both arts and sciences. So I did English, economics, German, and also maths. And that’s what made finance interesting to me, because it’s a social science. So you do have some theories. So it’s not completely subjective. But those theories aren’t set in stone like they are in physics. So reasonable people can have different views. Some people might think taxes should be higher, others might think taxes should be lower. They can make their arguments and they can learn from each other’s viewpoints. And that to me was what was really interesting about finance and economics. And so when I went to university, I studied economics and management at Oxford as an undergrad.
Aoifinn Devitt: It certainly is an emerging area, the human side of economics, and we’re looking a lot at behavioral areas, so we can certainly get back to that. And in terms of pursuing an academic path, can you talk us through your first year time in finance as a practitioner? And then how you moved towards an academic path.
Alex: Absolutely. So I never wanted to be an academic when I was growing up. So after economics and management, I, I went to Morgan Stanley to work in mergers and acquisitions, and I actually really enjoyed the job. So you’ll get a lot of ex-bankers who were mistreated and worked really long hours, but I was really lucky to have worked with some fantastic people and think I learned a lot. But why did I choose to leave? I remember the first time I did a deal, It was a great feeling. The next day, the Financial Times front page was describing that deal. And then the day afterwards, the headlines were something different. And I thought, well, I’ve spent 7 months of my life solving one company’s problems at one point in time. Whereas in academia, if you write a paper, that could be timeless, that could apply to different companies in different industries in different countries, over different time periods. So I thought that the bandwidth of your potential impact would be higher in academia than in industry.
Aoifinn Devitt: That’s interesting that, because I suppose that depends on there being a good nexus between academia and practitioners, so that some of the research that you’re doing gets put into practice. Do you think that the dialogue we have currently between academics and industry practitioners is at a level that we need it to be? Or do you think it could be improved?
Alex: I do think there’s a lot of room for improvement. So at the moment, some, although certainly not all practitioners, look at academic research somewhat opportunistically. So they might have an idea of what they would like to be true. And they will fish for whatever academic study supports their viewpoint. So in ESG, for example, there’s a lot of supporters of ESG, you can always find a study that shows that ESG pays off. And if you’re a skeptic, then you can similarly find a study which supports your point of view. And that is without looking at the quality of the study or the rigor of the study. Often you’ll use academic research a bit like a pick and mix, you just choose what you want. And I certainly don’t want to just blame the practitioners. Similarly, for academics, sometimes there’s a huge incentive to give these simple soundbites so that you’ll be handpicked by practitioners. So if you give— write a paper which finds something appealing, claiming ESG always pays off, or CEOs are always overpaid, or share buybacks are always a bad thing, that’s something where you will have a captive audience. Why I fear that academics are sometimes skewing the results of their research to be something that will be picked up by practitioners and into 280 characters.
Aoifinn Devitt: That’s interesting. Also, we talked earlier about your TED Talks in the introduction. I do think that having different ways of framing your research and perhaps communicating it certainly helps, as opposed to, say, longer journal papers that may not be always absorbed.
Alex: That is true, because like, as an academic, how you get tenure and promotion is for academic articles published in academic journals, but those articles are often really complex and obscure, and they’re not impactful for a general audience. So it means, yeah, your research research gets published, but does it have impact on the wider world? Probably not. So I do think it’s incumbent upon academics to make their research more accessible. That could be through writing articles in, say, the Financial Times or the Wall Street Journal, doing podcasts like this. And I do think it’s a huge pleasure, not a burden, to be able to speak to practitioners. However, how the academic sort of hierarchies work is you are not really evaluated according to your wider impact. And there are indeed some academics who think, well, if you are explaining it to industry practitioners, you’re dumbing the research down, a bit like some people might look down at indie musicians who go mainstream for selling out and not being pure. But I think that’s a really snobbish way of looking at things, right? We do research in order to have impact. We are funded by alumni and by corporate donors and so on, and they want us to do research because it affects the wider world, not just because it’s something that other academics can see as intellectually interesting. So I do think it’s incumbent upon us as a profession to make our research more relevant. Really appreciate invitations like this podcast to be able to do that.
Aoifinn Devitt: Well, let’s dive straight in then to your current areas of research. And what are your main focuses today?
Alex: The main thing that I’m focused on right now is responsible business, the idea that business should serve wider society, not just short-term shareholder interests. And this is a topic where I’m certainly not the only person working on this topic right now. But many people, they focus on the moral and ethical case. For responsible business, and some seem to like guilt-trip companies and say, well, it is your moral responsibility to serve wider society. But why I think that’s problematic is for two reasons. First, I’m not sure whether this guilt-tripping approach works because different people will have different preferences as to what is important. Some people might say, you as a company, it’s your responsibility to shut down all your coal-fired power stations because climate change is a huge threat. Whereas others might say, no, if you do that, you’re going to make a lot of people redundant who are working in power stations and so on. We do care about employment, particularly among those who might not be as affluent as often the people reflected by investors and so on will be able to think about. So I think one issue is that there are some things which are subjective and different people have different values. And then number two is that if it’s purely a moral and ethical case, then it will always be secondary to the minds of any CEO or CIO. So what I try to focus on is the business and financial case. So why should a company be responsible? Yes, it’s good for wider society, but also it’s good business. And so what I try to do is to merge and the objectives of profit and purpose and show that in some occasions, it is possible to achieve both. And that’s in contrast to the polarization you often see. Some people think businesses should always be about just serving wider society. Others will argue, no, the goal is only profit, and ESG is a distraction. I want to try to have some middle ground and say it is possible to create shared value for both shareholders and wider society.
Aoifinn Devitt: That’s very interesting. You mentioned on some occasions, it makes good business sense. Do you think that as the case for responsible investing and responsible conduct becomes more and more integrated into typical business plans, that those incidents where there is that impact on the double bottom line, as positive impact, are growing, that it’s increasingly easy to make the business case for responsible behavior?
Alex: I’m actually not sure. I think there’s arguments for both ways. So on the one hand, yes, there is indeed evidence that many things do indeed pay off for both social and shareholder value. So why my book, which you referenced, is called Grow the Pie. The idea is that the pie is not fixed. It’s not shareholders who are fighting with stakeholders. There are certain things that you can do which can benefit both. So as an example, if you treat your workers well, That’s not just being humane, it’s also making the employees more motivated and more productive, more likely to stay, boost your long-term performance. But I think there will always be some inherent trade-offs. For example, if a company donates to charity, that automatically reduces profits. It reduces the dividends that a company can pay to its shareholders. And it means that the shareholders themselves, let’s say they often might want to give part of their dividends to charities., but they’re not able to do that if the dividends have fallen because the company has made that charitable donation division. So I think regardless of how much attention gets paid to responsibility, the fact that it is becoming more embedded, as you say, even, there will always be some inherent trade-offs. I think one of the problems with the responsible business movement and why ESG has got a backlash in recent years is that there are some advocates who deny any instance of a trade-off, and it seems then a bit like wishful thinking, and it’s not something which is convincing many business people.
Aoifinn Devitt: I think that just getting back to, I know in your book, you mentioned that some of the calls for reform are too unrealistic and unbalanced. And that’s, I presume, what you’re referring to there. Are there any other examples of where some of the requests just aren’t practical in terms of requests for reform?
Alex: Yeah, so I think one of the concerns is that people think that it’s a company’s responsibility to solve all of the problems in the world. So we often think a purposeful business should serve customers and workers and the environment and suppliers and so forth. We have the 17 Sustainable Development Goals, and often investors and workers and customers will have a box-ticking approach and say, well, how many of these SDGs do you tick? But why is that problematic? Two reasons. First, there’s trade-offs between different stakeholders. So going back to my early example, if you are shutting down a polluting plant, that’s great for the environment, but it’s bad for workers. And so you can’t serve everybody. That is a decision in which you’re going to benefit some and hurt others. And then number 2 is that there’s also trade-offs between shareholders and stakeholders. So we often hear this message that everything that we do to benefit wider society will always show up in long-term profits. But the evidence doesn’t support that. What it supports is the idea that if you invest in material stakeholder issues, that does pay off. So what do I mean by material stakeholder issues? Those are the ones that are most relevant for your industry or your business model. Again, let me give an example. Let’s take the tech sector. What is a material stakeholder issue? Those could be things like cyber addiction, cyberbullying, misinformation, customer privacy. And if you are top of your game on those issues, that’s really important for your business. However, climate change, yes, that is the world’s greatest threat right now. However, that is not that material an issue for a tech company, because you do your business in the cloud, you don’t have so much of a footprint. So even if you are top of your game and the first among equals in your industry, that’s not going to be so critical to you. So what’s important is for a company to recognize what are the key material stakeholder issues in your industry, and focus on those and not try to be all things to all people.
Aoifinn Devitt: And obviously, one of the key objectives here is balance. In the approach. If you were to look at, say, where the pendulum is swinging today, and you think of some of the expectations in the aftermath of COP26, and what we saw some very high-profile private sector asset managers proclaim, where do you think the pendulum is in terms of around that balance? Has it swung too far, perhaps, in favor of gestures towards responsible investing, which maybe leads to greenwashing down the line?
Alex: Yes, I don’t think that we are close to where the optimal balance is. So If we go back 15 years ago, so when I first started working on this topic, nearly everybody was very skeptical about ESG. And now what’s great is that people do recognize it’s really important. But I do think the pendulum has swung too far the other way, is that people think, well, ESG is the only important thing, let’s forget about profits and long-term commercial success. And so how does that manifest? Well, when an issue comes in the news, Everybody is calling for companies to react to that issue immediately. So let’s say Mr. Floyd is killed, then every company is expected to speak out immediately or donate money to Black Lives Matter. And certainly, as an ethnic minority myself, I am very sensitive to the importance of racial diversity and inclusion. However, what is the best way for a company to address that? It might be not to immediately donate money to charity, but to look internally about discrimination in its hiring and promotion processes. Not just on ethnicity, but gender and many other dimensions. It might not only look at diversity in terms of the number of people it’s hiring, but inclusion, what are the ways that they’re incorporating psychological safety, encouraging dissent, and so forth. It’s really easy for a company to react by just posting a black square on Instagram, or donating money. And I feel that in a world in which investors are calling for quick sort of visible signs of doing something, then what companies will focus on is what’s externally visible, rather than what actually makes a lot of difference. A second issue, as I alluded to earlier, is climate. And absolutely, don’t get me wrong, I believe climate to be a really, really important issue. However, there are important trade-offs, and if you are too quick on decarbonization, you will make a lot of people redundant. And those people, to be fair, many of them are working-class people who, if they were to be made redundant, it’s not clear how quickly they might get another job. And that’s something which will really jeopardize not only their future but their families’ financial future as well. And also even with climate, it’s really nuanced. So one of my other hats is as a practitioner, I’ve served on the Responsible Investment Committee for Royal London Asset Management for 6 years. And we run 6 sustainable funds. And as some of you will know, MSCI has this warming tool, which calculates the contribution of your portfolio towards global warming. And when we ran this on our portfolio, we found that the worst offenders were semiconductor companies. Why? When you manufacture semiconductors, you release perfluorocarbons to the atmosphere, and perfluorocarbons are even worse than carbon dioxide for leading to climate change. Yet semiconductors can be used in solar panels. They could well be the solution to climate change. So this demand for companies to decarbonize and not do any activity which contributes to carbon footprint that might ironically stifle some of the best solutions to climate change, such as building semiconductors.
Aoifinn Devitt: It certainly would be a case for the long-term versus maybe the short-term, a short-term fix versus the long-term commitment and long-term thinking. Another area of grandstanding, or at least of gestures, seems to be in the area of divestment versus engagement. What are some of your thoughts on where we are in terms of having a sensible conversation on that?
Alex: Thanks, Aoifinn. I’m really glad you asked that because I think this is something which is quite greatly misunderstood. So often people think, well, the best way to change companies is to divest from, say, fossil fuels, from tobacco, from alcohol, because when you sell, you’re depriving a company of capital. But that’s not the case, right? Because you can only sell when somebody else buys. So if I’m selling my stock, another investor might buy, and that other investor could well be less concerned about climate change and social issues than me. So it might be in many cases The best way that I can actually ensure that a company is going to reform itself is by holding those assets and engaging with the company. For example, Engine Number One, the activist hedge fund, the only way it was able to get some climate-friendly directors on the board of Exxon is by having skin in the game, by having a seat at the table and being able to push those directors’ nominations through. Now it’s really easy for an investor to say, look how green our portfolio is. We don’t hold any problematic companies like fossil fuels or alcohol and so on. But that would be similar to if a doctor was to say, look how great a doctor I am. None of my patients are sick. Well, it’s your responsibility as a doctor to go to the sick patients and to treat them and to make them better, not just to turn them away and say, I’m only going to be working with the healthy. So similarly as investors, I do think there’s a lot to be said out of going with problematic companies and engaging. Now, certainly there is a limit. If after engagement, a company is still really unresponsive, then I do think you should divest. But I do think we want to look at both tools together. Whereas, as I alluded to earlier, sometimes we look at this as an extreme. We want a company to always divest as the first port of call, just to show that you’re not holding any airports or energy companies when I think actually actually, it might be quite legitimate for you to hold these problematic companies if you’re engaged with them, and there is evidence that the engagement is indeed making a difference.
Aoifinn Devitt: Do you think there’s a precedent set in the case of Engine No. 1 now that engagement has teeth? And do you find companies getting more responsive?
Alex: Yes, and actually, it’s interesting, it’s not just Engine No. 1, because I need to make sure that I’m not subject to my own criticism, which was that you can always handpick one example to support your viewpoint. Instead, way before Engine Number One, there were some really nice academic papers which looked at large-scale shareholder engagement across a multitude of dimensions. And often people think, oh, we don’t like shareholder engagement because shareholders are always going to just be about short-term profit. When they engage, aren’t they forcing companies to pay out more dividends and to cut wages and so on? But that’s not the case. So there’s some really great academic studies published in the most stringent journals showing that when engagement takes place, this will typically increase not only shareholder value, but also increase productivity. And it will do so without lowering wages. It also improves dimensions such as innovation. And this makes a lot of sense, right? Because if you’re a shareholder, what you want to do is to improve the company for the long term. And the way that you do that is to encourage companies to take these ESG issues more seriously, encourage companies to be more innovative, and so forth. So I do think engagement engagement typically is a useful tool. Now, clearly, it shouldn’t be just engagement and not divestment. Often, the reason why managers might be responsive to engagement is they know that if they’re not responsive, the investor will dump the stock and that will drive down the stock price. So I do think we want to have a combination of the two rather than just one or the other.
Aoifinn Devitt: And speaking of innovation, could you talk a little bit about innovation in your space? What are the areas of research currently that most excite you and maybe what you think will be occupying your mind and maybe you’ll be sharing with us over the next 5 years?
Alex: So I think within ESG, I think this has become a really major issue that many academics are trying to research. So 15 years ago, when I was writing my first paper on this topic, it was so hard to publish because this was not seen to be an interesting field. But now people have finally realized that this is something where there’s a lot of interesting questions. That practitioners want answered. And we as academics, we have the luxury of time and space, and methodologies in order to do that. So I also serve as the managing editor for the Review of Finance, that’s the top finance journal in Europe for academics. And we have just launched a special issue on sustainable finance, because we think it’s an area where there’s a lot of potential interest and a lot of great datasets. One other big issue within finance, what a lot of academics are looking at is fintech. So what is the potential impact of, say, blockchains and smart contracts and so forth? Is this something that could create value for society? Is this something which could be destructive? And so on. So I think those two areas are really interesting and where you’re seeing a lot of really exciting research.
Aoifinn Devitt: And let’s just take a few minutes to go back to some of your personal story, maybe, and reflections. If you have any creed or motto that you live by, whether in your academic work or as you bridge the practitioner and academic side, is there anything you can share there?
Alex: Certainly, it’s not so much a creed or motto as much of a purpose statement. So just like companies have purpose and mission statements, I’ve tried to do that for myself, which is to use rigorous research to influence the practice of business and to inspire other people to fulfill their potential. So let me briefly break that up. Let’s take the first part, to use rigorous research to influence the practice of business. So as an academic, my heart is research. However, I want to ensure that my research is not just read by other academics to look at something which is intellectually interesting, but instead to look at questions which are practical, such as, does purpose pay off? What’s the best way to pay CEOs to ensure they run their companies for the long term? So I love working on these relevant questions. And then also the opportunity to disseminate them to practitioners, such as through this podcast. Also the opportunity to be challenged by practitioners. So I will often present my research to companies. Actually, when we finish this podcast, I’m going to be joining a large asset management firm who have a book club. They’ve kindly selected my book Grow the Pie as, as the reading for the book club, and they will challenge me for things that they might not agree with. And through that process, I will be learning. And then the second part I mentioned is to inspire others to fulfill their potential. And this affects what I try to do in my life outside of work. For example, when I was a professor at Wharton, there were various charities which would come to me and say, Alex, could you serve on the charity board for this homeless charity or the hunger charity? They will always ask me to serve as treasurer, obviously, as being the finance person. But I said no to those. Why? Certainly homelessness and hunger are really important causes, but that wasn’t really linked to my purpose of inspiring others. So instead, the position that I took was to be the head coach for the American Cancer Society. So if somebody was to run a marathon for American Cancer Research, I would coach them, and I’d love that interpersonal inspiring aspect of coaching, just like I really really I love the teaching aspect of my profession. You could take somebody who comes to London Business School to do the MBA. Their goal is to do marketing. They’re only taking finance because they have to, because it’s part of the core. They dread it, but I’m trying to make it interesting and accessible and ignite in them a passion for finance that they might not have otherwise known. And that’s similar to what I wanted to do with the American Cancer Society. Somebody might see a marathon as something really daunting. To make that fun and to get them to believe in themselves and to achieve something that they previously thought was really difficult.
Aoifinn Devitt: Well, it’s a nice analogy actually, as a marathon runner myself, and marathons are the ultimate long game. And I suppose if you can break up any long game, whether that be marathon running or solving the problem of climate change into chunks, it certainly seems less daunting. And I may have to draw upon your coaching skills. I’ll file that one away for future reference.
Alex: Thank you. Yeah, I think it is like anything which has a big long-term outcome, it’s sometimes you might get demotivated because it’s really difficult to see progress, or you think the goal is so far off that if I was slack on one particular day, is it going to really make a difference? So yeah, if your goal is to run a marathon, you might think, well, I’m going to get to 5 miles by week X, maybe I’ll enter a 10K race by week Y, then a half marathon, and just to break something really long-term into small chunks is something that can be really motivating.
Aoifinn Devitt: And my last question is around any advice you might have for your younger self. And I think it’s particularly interesting given the dynamic field in which you work. You may not have perhaps anticipated the speed with which some of your ideas would gain currency, but equally, you may have experienced frustration around others not getting the same traction. Is there anything that you know now that perhaps you wish you had known as you embarked upon all of this?
Alex: Yes, I think it would be that if you live your life or your career trying to get external approval, that’s going to be something which is really random, right? If you write an academic paper, how do you know whether the journal will like it, right? The journal will send it to a peer reviewer, and that peer reviewer, their taste just might not be for fintech or for ESG. So even if they are important topics, somebody might just not like it. And similarly, you could do a great job in a pitch for a deal if you’re a banker, and you might just not get that pitch if, for example, the client just happened to jive on a personal level more with another type of banker. So I think it’s just to try to do what you yourself are passionate about. I know a lot of people say, ‘I’ll pursue your passion.’ It’s almost a cliché. But I do think it really has a lot of truth behind it. So when I worked on ESG back in 2006, I didn’t do it to get external approval. I didn’t do it because the journals were publishing papers in it. Nobody cared about it in academia, and few people cared about it in the real world. But because perhaps I have the long-term mindset, which was instilled in me through marathon running, I wanted to look at our companies that take a long-term approach. Or take an ethical approach for their employees, will they do better? I was just passionate about that question. And so when I submitted my paper to the first journal and it got rejected, I still was excited about the question. I kept persevering, and in the end it ended up being published in a top journal. But it did take a lot of work because the first couple of journals rejected it just because it was something new. So I think the whole idea is that yes, people know about the importance of perseverance, but you’re much more likely to persevere if you are doing what you’re passionate about and if you really realize that your external success will be partly due to randomness, so that when you do get rejected or when you do not win a particular mandate, you know that it is not purely down to you. It might be partly a taste issue, so this gives you the courage to keep going even if success is not immediately forthcoming. Now, that does not mean being blinkered. Certainly, if there is some feedback as to why your paper got rejected or why you did not win the mandate, try to take that on. But does that mean I should have completely changed my research field to work on efficient markets or something traditional. No, I still kept with ESG, but just to make sure that I would address the concerns of the editors and reviewers.
Aoifinn Devitt: Well, thank you so much, Alex. What I think of when I look at your research and after this conversation is really how, just how relevant and how integrated the work you do is into the real-time practice. And real-time is important because you’re getting your ideas out real-time, and you’re allowing them to be debated and really road-tested. So I really appreciate you coming here and sharing those insights with us.
Alex: You’re very welcome, Aoifinn. It’s great to be here. Thank you so much for the invitation to be on your podcast.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views Opinions are personal and should not be attributed to the organizations and affiliations of the host or any guest.
